Joint names insurance and contractors' liability

Following the decision of the House of Lords last spring in Co-operative Retail Services v Taylor Young Partnership [2002] 1 WLR 1419, the question of the relationship between an employer's obligation to insure (under one of the JCT contracts) and a contractor's liability for damage has been considered again by the Court of Appeal in its decision in Scottish & Newcastle plc v GD Construction (St Albans) Ltd [2003] All ER (D) 174, handed down in January this year. The outcome may make both employers and consultants distinctly nervous about their position.

The Scottish & Newcastle case

Scottish & Newcastle had employed GD Construction to refurbish a pub in Reading under an IFC 84 form of contract. One of the terms of the contract was that the Employer would take out joint names insurance in respect of the existing property in the names of itself, the Contractor and certain sub-contractors. The “Specified Perils” to be covered by the insurance included fire. During the course of the works, the roofing sub-contractor set light to the thatch of the existing building with a blowtorch and extensive fire damage was caused, leading to additional costs which the Employer looked to recover from the Contractor. The question of whether, assuming the fire had been negligently caused by the roofing subcontractor, the Contractor could be liable to the Employer was dealt with by way of a preliminary issue. The Judge in the Technology & Construction Court found that the Contractor could be liable and the Contractor appealed.

The Contractor’s argument was that it could not be liable because the indemnity provisions (clause 6.1.2 of IFC 84) covered liability for negligent defaults on the part of the Contractor or it sub-contractors; at the end of that clause was a provision excluding loss or damage to property which should have been insured (ie the existing premises), provided that the loss or damage was caused by a “Specified Peril” (one of which should have been fire). Furthermore, had the Employer taken out the insurance, the Insurers would not have been able to bring a subrogated claim against the Contractor because the Contractor was a joint insured and because the contract provided for an express waiver of subrogation rights.

The Employer argued that this position was wrong because it was only required to insure against “fire”, not against “fire negligently caused”. In addition, the indemnity provisions covered not only negligence, but also other causes of loss and damage; as the clause did not expressly exclude liability for negligence, it should only be read as doing so if, on a reasonable reading, it could not cover any other ground of liability (which the Employer said was not the case).

The Court of Appeal found that the Contractor could not be liable. “Fire” meant fire howsoever caused unless the parties expressly provided otherwise (which they had not). This meant that negligentlycaused fire should have been insured against by the Employer. The wording of 6.1.2 made it clear that liability arising from Specified Perils (including fire) was excluded because it was intended that that risk should be met by insurance procured by the Employer. The fact that, had insurance been in place, the Insurers would not have been able to bring a subrogated claim because the policy was in joint names and there was an express waiver of subrogation rights con- firmed that the parties had not intended there to be recovery from the Contractor.

Importantly, in his reasoning, Mr Justice Aikens made it clear that whether the effect of joint names insurance being required was to protect the Contractor from liability for losses caused by insured perils would turn on the wording of the specific contract in question. Here the indemnity and insurance provisions were sufficiently linked to enable this finding; in other cases, however, the courts had effectively found that they were not.

The impact for employers, contractors and consultants

It might be thought that the obvious moral of the Scottish & Newcastle case is that employers should take out the insurances that they have contracted to: after all, the risk of irrecoverability from the Contractor would be met by the Insurers, who would already have taken a premium which reflected a lack of recourse to the Contractor. The position though, is not quite that simple: the Employer may have taken out the insurance, but accidentally vitiated the cover; alternatively, the Employer may have had the misfortune to insure with an Insurer which has become insolvent and cannot pay out on the claim.

The real moral of the case for employers is to be careful how the contractor’s liability is limited. If you want the contractor to be held liable for his negligence or that of his sub-contractors, then the contract must expressly make clear that this is to be the case. What you cannot do, however logical a compromise it may seem, is agree with the contractor that he will only be liable to the extent that losses cannot be recovered under the insurances, because Insurers will then argue that there is “no loss” as if they fail to pay out, the contractor will have to pay up instead, leaving the contractor on the hook.

The finding that the contractor has no liability to the employer because the parties have agreed that the risk is to lie with the employer, who will insure against it (which is what CRS and Scottish & Newcastle may be argued to amount to) throws up problems for consultants as well. In the CRS case, even though the contractor was jointly responsible with the consultants for the damage, the fact that he could not be liable to the employer (on similar reasoning to Scottish & Newcastle) meant that there was no liability for the same damage (as required by the Civil Liability (Contribution) Act 1978) which would have allowed the consultants to claim contribution, leaving the consultants to meet 100% of the liability even though they were not 100% responsible. This has brought net contribution clauses back into the limelight, but consultants must be very careful about how these are drafted.

Finally, a word of caution for contractors, who might be feeling comfortable after the CRS and Scottish & Newcastle decisions. First, both decisions turn on the wording of the contracts in question and unless yours is identical, you cannot be certain how the courts will construe it. Second, none of the cases have dealt with the impact of cross-liabilities clauses (which allow one co-insured to claim against another under the same policy): as these are almost invariably required on the larger projects, contractors may find that the position is not quite as comfortable as they might have hoped.

For further information please contact Sarah Thomas at [email protected] or on +44 (0)20 7367 2094.